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Business model

A business model describes the rationale of how an organization creates, delivers, and

captures value[1]

 (economic, social, or other forms of value). The process of business model

construction is part of business strategy. 

In theory and practice the term business model is used for a broad range of informal and

formal descriptions to represent core aspects of a business, including purpose, offerings,

strategies, infrastructure, organizational structures, trading practices, and operational

processes and policies. Hence, it gives a complete picture of an organization from a high-

level perspective.

Whenever a business is established, it either explicitly or implicitly employs a particular

business model that describes the architecture of the value creation, delivery, and capture

mechanisms employed by the business enterprise. The essence of a business model is that it

defines the manner by which the business enterprise delivers value to customers, entices

customers to pay for value, and converts those payments to profit: it thus reflects

management’s hypothesis about what customers want, how they want it, and how an

enterprise can organize to best meet those needs, get paid for doing so, and make a profit.[2]

 

Business models are used to describe and classify businesses (especially in an entrepreneurial

setting), but they are also used by managers inside companies to explore possibilities for

future development. Also, well known business models operate as recipes for creative

managers.[3]

  Business models are also referred to in some instances within the context of 

accounting for purposes of public reporting.

Over the years, business models have become much more sophisticated. The bait and hook  

business model (also referred to as the "razor and blades business model" or the "tied

products business model") was introduced in the early 20th century. This involves offering a

basic product at a very low cost, often at a loss (the "bait"), then charging compensatory

recurring amounts for refills or associated products or services (the "hook"). Examples

include: razor (bait) and blades (hook); cell phones (bait) and air time (hook); computer

printers (bait) and ink cartridge refills (hook); and cameras (bait) and prints (hook). An

interesting variant of this model is Adobe, a software developer that gives away its document

reader free of charge but charges several hundred dollars for its document writer.

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In the 1950s, new business models came from McDonald's Restaurants and Toyota. In the

1960s, the innovators were Wal-Mart and Hypermarkets. The 1970s saw new business

models from FedEx and Toys R Us; the 1980s from Blockbuster,  Home Depot,  Intel, and

Dell Computer; the 1990s from Southwest Airlines,  Netflix,  eBay,  Amazon.com, and

Starbucks. 

Today, the type of business models might depend on how technology is used. For example,

entrepreneurs on the internet have also created entirely new models that depend entirely on

existing or emergent technology. Using technology, businesses can reach a large number of 

customers with minimal costs.

More recently academics around the world have moved towards simplification of a businessmodel. The term often used out of context has led to it becoming often confused as a concept.

Osterwalder(2010)[4]

  expanded his Phd into a commercial product by simplifying the

business model into a 9 step process, which can be easily displayed using sticky notes

Examples of Business Models 

Bricks and clicks business model

Business model by which a company integrates both offline (bricks) and online

(clicks) presences. One example of the bricks-and-clicks model is when a chain of 

stores allows the user to order products online, but lets them pick up their order at a

local store.

Business reference model

Business reference model is a reference model, concentrating on the architecturalaspects of the core business of an enterprise, service organization or government

agency.

Collective business models

Business organization or association typically composed of relatively large numbers

of businesses, tradespersons or professionals in the same or related fields of endeavor,

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which pools resources, shares information or provides other benefits for their

members.

Component business model

Technique developed by IBM to model and analyze an enterprise. It is a logical

representation or map of business components or "building blocks" and can be

depicted on a single page. It can be used to analyze the alignment of enterprise

strategy with the organization's capabilities and investments, identify redundant or

overlapping business capabilities, etc.

Although Webvan failed in its goal of disintermediating the North American

supermarket industry, several supermarket chains (like Safeway Inc.) have

launched their own delivery services to target the niche market to which

Webvan catered.

Cutting out the middleman model

The removal of intermediaries in a supply chain: "cutting out the middleman". Instead

of going through traditional distribution channels, which had some type of 

intermediate (such as a distributor, wholesaler, broker, or agent), companies may now

deal with every customer directly, for example via the Internet.

Direct sales model

Direct selling is marketing and selling products to consumers directly, away from a

fixed retail location. Sales are typically made through party plan, one to one

demonstrations, and other personal contact arrangements. A text book definition is:

"The direct personal presentation, demonstration, and sale of products and services to

consumers, usually in their homes or at their jobs."[5]

 

  Distribution business models, various

  Fee in, free out

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Business model which works by charging the first client a fee for a service, while

offering that service free of charge to subsequent clients.

Franchise

Franchising is the practice of using another firm's successful business model. For the

franchisor, the franchise is an alternative to building 'chain stores' to distribute goods

and avoid investment and liability over a chain. The franchisor's success is the success

of the franchisees. The franchisee is said to have a greater incentive than a direct

employee because he or she has a direct stake in the business.

Freemium business model

Business model that works by offering basic Web services, or a basic downloadable

digital product, for free, while charging a premium for advanced or special features.[6]

 

Industrialization of services business model

Business model used in strategic management and services marketing that treats

service provision as an industrial process, subject to industrial optimization

procedures

Formal descriptions of the business become the building blocks for its activities. Many

different business conceptualization exist.

Osterwalder's work [1][7]

  propose a single reference model, called Business Model Canvas

based on the similarities of a wide range of business model conceptualizations.

With this business model design template, an enterprise can easily describe their business

model. Aspects of the template are Infrastructure, Offering, Customers, Finances, etc.

Complementarities of business models between partnering firms

Studying collaborative research and the accessing of external sources of technology, Hummel

et al. (2010) found that in deciding on business partners, it is important to make sure that both

 parties’ business models are complementary. For example, they found that it was important to

identify the value drivers of potential partners by analyzing their business models, and that it

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is beneficial to find partner firms that understand key aspects of our own firm’s business

model.

Business Modelling

Business Modelling is an important tool to both capture, design, innovate and transform the

business[10]

. However, in order to transform ones organization and align them to ones

business model, a business model should not be seen separately, but in connection with[11]

: 

A step-by-step roadmap that describes the synergy and context between Business Model and

alignment of Strategy Map, Scorecards, etc. into the organization.

The main business goals of the organization, e.g. strategic business objectives, critical

success factors and key performance indicators, which a holistic business model approach

should include.

The main business Issues/pain points and thereby organizational weakness, which a holistic

 business model approach should include for they represent the threat to the company’s

business model.

A clear cause and effect linkages between the competencies, desired outcomes and

performance measurements e.g scorecards.

An emphasis on business model management and thereby a continuous improvement and

governance approach to the business model.

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Strategies for Internet Economy

The business maturity level, in order to develop the organization representation of core

differentiated and core competitive competencies [linked to strategy], which is a basis for

building a business model as they the represent some of the most important sources of 

uniqueness. These are the things that a company can do uniquely well, and that no-one else

can copy quickly enough to affect competition.

The information flow, and thereby information need for effective and efficient decision

making.

Such a holistic approach would help clarify both intent and sources of synergy and disconnect

between business model, strategy, scorecards, information, innovation, processes and IT

systems. This includes architectural alignment as well as business transformation and value

and performance views. Such dialogues allow Executives to use the business model with their

business alignment.

A seemingly kaleidoscopic world One can use many criteria to distinguish between actors in

the New Economy: technological status (access providers, portals, final sites), access price

charged (free sites versus pay sites), type of activity (products The impact of the new

technology has to do with the way demand.

whether from final consumers or from businesses, is connected with supply. In the "old" type

of economy, consumers never consider to visit all possible brick and concrete" shops offering

the good or service they look for in order to compare prices and qualities in the most general

sense. In the"new economy", they can do so at negligible costs (BAKOS, 1997). To

overcome the mentioned difficulty, it is customary in the old economy to useproxies" like

brand, marketing devices (loyalty rewards, etc.), advertising, etc.

Designed to "pilot" consumers amidst the forest of suppliers, product stypes, products

qualities, etc. But these proxies – we almost have for gotten about it – have been designed to

overcome the difficulty that consumers, due to search costs, never will be able to visit all

possible suppliers. This postulate becomes if not obsolete at least way too strong in the

Internet economy. This does not mean that advertising and the other proxies already

mentioned become useless but that, under their current design andas long as can be seen, they

are considerably less effective and important for at least part of the consumers.

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As soon as the consumer can check in a minute a number of possible goods corresponding to

his/her needs, their prices and their features, why would he/she bother to try evoking the ads

he/she has seen, or t rust more one brand than another? This might represent a

considerable change from the traditional situation as well as from the usual array of 

management tools. The true revolution, however, will have to do with what could be called

"pure piloting" sites.

We define these sites as those for which the main activity consists precisely in providing

consumers with as complete and refined a scheme of information as possible on the demand

and supply hinterland by suggesting, designating, showing, analyzing, comparing, etc.

products and/or services that might satisfy real or potential needs of theirs. The word

"piloting" is used here to mean that the activity does not only consist in providing

information to each side on the other, but entails indeeda transformation process of demand

as well as of supply.

As a matter of principle, piloting may be free (financing relies then purely on publicity) or

charged to the consumer (financing of the site relies then purely on a percentage of the price

paid by the consumer) or charged to the producer (financing of the site relies then purely on a

percentage of the price paid by the producer) or mix any combination of these three

possibilities. Piloting costs are not zero, by any means, but may be essentially of a fixed type

for large ranges of number of clients served. One can intuitively feel that if major

competitive advantages can be found in the new economy with respect to the old one, they

should lie precisely in pure piloting.

What has come to be designated as "the New Economy" is an incredibly heteregeneous set of 

economic enterprises with its own style of new young millionaires, with its uncertainty, its

hopes and its actual and potential desillusions. To some analysts, it spreads out of a new

industrial revolution, to others it merely supports a financial bubble. To the latter, it will at

bestgive way to a new handling of information for traditional businesses. To the former, it

opens a new world of business which we barely perceive today.

As a matter of fact, it is not even clear what the truly new features of the New Economy are.

In this paper, we shall ignore intranet issues as to how traditional businesses might benefit

from the new information technologies to reorganize their internal structure and functioning.

We shall also restrict ourselves to the Internet market economy as the core of the neweconomy.

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which do not reap any profit and are barely expected to do so in a distant future. Finally,

doubt has arisen even about the appropriateness of this "new economy": Does it create value?

Many have also voiced a fear that markets might not be as effective and legitimate in the new

world of business which we are witnessing.

which, in fact, epitomize variations of the same theme: how to discriminate between real

value creation in the Internet Economy and the mirages it might trigger, at the business level

as well as at the collective level. The first section will try to distinguish between the so many

different actors in the new economy and offer an interpretation of what can be regarded as the

most important activity of the internet economy and its likely evolution. The second one will

deal with some of the invoked mirages of the Net economy, namely the "irrational"

overvaluation of technological conditions, in light of the discussion in the first section. Some

concluding comments are presented in the third section.

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